Bond Investment Methods: A Systematic Guide for Beginners

Why Should You Pay Attention to Bonds Now?

By 2025, bonds are no longer a conservative choice in the financial markets. They are being re-evaluated as assets that outperform deposit yields while protecting portfolios from stock market volatility. Especially as expectations for interest rate cuts increase, rising bond prices are attracting investor interest.

Recently, the average daily trading volume in the Korean bond market has reached about 25 trillion won, indicating increased trading activity, with a broader selection from government bonds to ESG bonds. Understanding proper bond investment methods in this changing environment is the first step toward wise asset management.

The Essence of Bonds: Starting from IOUs

A bond is a document in which governments, corporations, and public institutions borrow money from investors, promising to repay the principal along with interest after a certain period. From the investor’s perspective, it grants the right to receive interest income and the principal at maturity.

The main attractions of bonds can be summarized as:

• Returns exceeding deposit yields(currently around 2% per year)
• Significantly lower price volatility compared to stocks
• Predictable cash flow through regular interest payments

Five Key Features of Bonds

1. Differentiated safety based on creditworthiness

Government bonds or AAA-rated corporate bonds offer extremely low risk of principal loss, providing safety comparable to deposits. Conversely, corporate bonds with lower credit ratings require accepting higher risk for higher interest rates.

2. Regular interest collection

Most bonds pay interest periodically, every 3 to 6 months. As of now:

• 3-year government bonds: 3.32% annually
• Seoul municipal bonds(5-year): 3.65% annually
• Korea Electric Power Corporation (KEPCO) special bonds(10-year): 4.10% annually
• Corporate bonds(depending on credit rating): 4~6% annually

3. Free trading before maturity

Unlike deposits, bonds can be sold at any time in the market. If funds are urgently needed, they can be liquidated at market prices, which is a significant advantage.

4. Price movements due to interest rate changes

When market interest rates fall, existing bond prices rise; when rates increase, prices fall. This can be leveraged to seek capital gains based on interest rate outlooks.

5. Tax benefits

Direct investments are taxed only on interest income, while capital gains from trading before maturity are tax-exempt. ESG bonds may receive additional tax benefits.

Bonds vs. Fixed Deposits: Which to Choose?

Features and Yields of Different Types of Bonds

Government Bonds

Issued by the government, with the highest credit rating. Highly stable but relatively low interest rates.

Special Bonds

Issued by public enterprises like KEPCO or the Road Corporation. Slightly riskier than government bonds but offer higher yields with sufficient stability.

Local Bonds

Issued by local governments, with slightly higher risk than government bonds but still considered stable investments.

Financial Bonds

Issued by banks or financial institutions, offering high liquidity and suitable for short-term funds.

Corporate Bonds

Issued by companies, with significant yield differences depending on credit ratings. It is essential to check the issuing company’s creditworthiness before investing.

Overseas Bonds

Global safe assets like US Treasury bonds, offering diversification in dollar assets and currency hedging benefits. The yield on 10-year US Treasury bonds(in 2025)is around 4.25% annually.

Characteristics of Investors Suitable for Bond Investment

Bonds are especially suitable for investors such as:

People needing regular cash flow: Retirees or pre-retirement workers can cover living expenses with regular interest income.

People uncomfortable with stock volatility: If large fluctuations in stocks cause stress, bonds can reduce portfolio volatility.

People emphasizing asset allocation: Allocating part of the total assets to bonds can effectively diversify risk.

People seeking tax benefits and global diversification: Enjoy tax exemption on capital gains and the currency diversification effect of overseas bonds.

Three Risks You Must Know Before Investing in Bonds

Risk of bond price decline when interest rates rise

When interest rates increase, existing bonds become less attractive, causing their prices to fall. For example, a bond paying 3% interest will face downward price pressure if market rates rise to 4%. Mitigation: If rate hikes are expected, choose short-term bonds of 1–3 years or floating-rate bonds.

Risk of issuer credit deterioration or bankruptcy

If the issuing company faces difficulties, you may not receive the principal. The lower the credit rating, the higher this risk. Mitigation: Start with high-grade bonds like AAA or AA, and limit lower-rated bonds to a small portion of your portfolio.

Foreign bond currency risk

For dollar bonds, exchange rate fluctuations affect actual returns. If the dollar weakens, interest remains the same but KRW value may decline. Mitigation: Consider currency-hedged ETFs or keep overseas bond exposure to a small part of your total assets.

Three Ways to Invest in Bonds

1. Direct purchase of individual bonds

Select and buy bonds directly through securities firms’ HTS/MTS, banks, or financial platforms. Only interest income tax applies; capital gains are tax-exempt.

2. Bond funds

Participate in funds managed by asset managers that diversify investments across multiple bonds. Even small investments can provide diversification benefits, but fund fees apply.

3. Bond ETFs

Trade on stock exchanges in real-time like stocks. Low fees, high liquidity, and excellent diversification are key advantages.

Bond Investment Checklist for Beginners

Before investing, verify:

• Not only credit ratings but also product risk grades, maturity structure, liquidity
• Review prospectus and credit evaluation reports
• Consider market interest rate outlook
• Match investment duration with your goals

Portfolio ideas:

• Beginners: 50–70% government bonds or bond ETFs + 20–30% high-quality corporate bonds + 10–20% others
• Intermediate: Mix of bonds with various maturities and credit ratings
• Advanced: Fully diversified including global bonds

How to Start Bond Investing

Bonds are an essential tool for wise asset management. Especially during interest rate fluctuations, combining stocks and bonds can significantly reduce overall portfolio risk.

Start with relatively safe products like government bonds or bond ETFs to gain experience, then gradually expand to corporate bonds or overseas bonds. Compare each bond’s credit rating, yield, and maturity comprehensively, and choose an investment method aligned with your goals and cash flow plan.

Frequently Asked Questions About Bond Investment

Q: Are bonds fully guaranteed like deposits?
A: No. Bonds are not covered by deposit insurance, and if the issuer goes bankrupt, principal loss can occur. Always check the issuer’s credit rating and product structure before investing.

Q: Besides credit ratings, what else should I consider?
A: Review product risk grades, liquidity, maturity structure, prospectus, and credit evaluation reports comprehensively.

Q: How does interest rate fluctuation affect bond prices?
A: Bond prices and interest rates move inversely. When rates rise, bond prices fall; when rates fall, bond prices rise.

Q: How should I match maturity with my investment period?
A: Choose maturities aligned with your investment goals. Short-term funds suit short-term bonds; long-term funds are better with long-term bonds.

Q: How can I achieve diversification benefits with bonds?
A: Since bonds have low correlation with stocks, including them in your portfolio can reduce overall volatility and provide stable returns.

Q: How do I compare bond yields?
A: Compare yields of bonds with similar credit ratings and maturities, considering not only interest rates but also actual investment conditions and tradability.

Q: What are ESG bonds?
A: Bonds issued to promote sustainability, such as environmental protection, social responsibility, and transparent management. Some offer additional tax benefits or government support, and they are a growing global trend with long-term growth potential.